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Companies increasing leverage while it’s still cheap

Investment-grade corporate debt issues have totaled about $920 billion year-to-date through August 22, nearing the $1.1 trillion sold during all of 2016. Below-investment-grade debt has surpassed 2016 levels with $418 billion issued and is at a higher previous yearlong record. Below-investment-grade issues were about $412 billion last year and have been steadily climbing up as a percentage of total corporate debt issues.

Two drivers for the corporate debt market have been anticipation of higher interest rates and foreign demand. With the Federal Reserve expected to raise rates in the near future, borrowers are hurrying to lock in low borrowing costs. International demand for higher-yielding debt issuances as foreign yields have been materially lower and even negative has also driven more firms to issue debt in lieu of equity.

Defaults in 2017 have been much lower than in recent years with only about $9.7 billion in bonds defaulting; in comparison, $29 billion and $31 billion in bonds defaulted in 2016 and 2015, respectively.